Since the enactment of the Medicare/Medicaid insurance program, significant changes have occurred in the composition of the sources of funds used by the hospital industry to finance capital expansion. There has been a shift away from philanthropy and government support toward debt, usually tax-exempt bonds, as the primary source of funds. The principal objective of the study proposed here is to incorporate the potential risk-reducing aspects of Medicare/Medicaid cost based reimbursement into a model of the determinants of the hospital's capital structure in order to identify the incentives in the present financial environment which encourage debt financing. The research plan incorporates recent developments in the theory of corporate finance and financial decision-making in regulated industries. The models used will evaluate the position of the lender and the hospital under reimbursement. They will then be used to test the hypothesis that reimbursement has produced a shift in the supply and demand for debt funds. Depending on data requirements, empirical tests will be performed based on the specifications suggested by the research.